Most businesses in New Zealand are small. According to Statistics New Zealand Business Demography, 97% of New Zealand enterprises have fewer than 20 employees.

Running a business is a hard task for many small business owners. 37% of New Zealand companies founded in 2010, with fewer than 20 employees, survived until 2016.

Some small business owners start another business after their first business failed.  

When it comes to your home loan application, banks will evaluate how strong your business’s cash flow is if you are the business owner. However, if it’s your second or subsequent business, and you register it under your old company's name, your loan application may be negatively impacted. 

That’s why in this week’s blog, we draw on two case studies to show how crucial it is to register another company name for your new business. As you will read in the worst outcome of the two case studies, if you still run your new business under your previous company name, your bank could decline your home loan application. 

Why running your new business under your old company’s name may negatively impact your home loan application?

Video Timeline:
1. Client A started a new business under his old company, but later, his bank declined his home loan application. 00:15

2. Owning two businesses under one company, and with the help of his accountant, Client B didn’t have to provide a two-year financial report. 02:15

1. Client A started a new business under his old company, but later, his bank declined his home loan application. 

Six years ago, Client A registered his computer repair company and started running the business. However, he didn’t run the business well and had to close it. 

Eighteen months ago, the client bought another takeaway business. He ran his new business very well and it became very profitable after the first year of his ownership. But his new business was registered under his old company.

The client approached us when he wanted to apply for a home loan. He could only provide a one-year financial report for his new business. However, from his bank’s perspective, the client had kept his company for six years, so he must provide a two-year financial report. Unfortunately, he couldn’t prove that his new business wasn’t associated with his old one. Consequently, his bank declined his home loan application.

2. Owning two businesses under one company, and with the help of his accountant, Client B didn’t have to provide a two-year financial report. 

Client B faced a similar situation as Client A. He closed his old business many years ago and then set up a new one 15 months ago.

Likewise, his two businesses were registered under his one company. With Prosperity’s help, he asked for his accountant to provide evidence which proved that his two businesses were not connected.

Considering this evidence, his bank only evaluated his 15-month trading performance and then approved his home loan application.

So, if your previous business is not profitable and you want to start a new one, we highly recommend you talk to your accountant in the early stages of setting up your new business.

From lending perspective, if you own multiple businesses under one company name, the trading performance of your previous businesses has an impact on your borrowing capacity. Registering a new company would help your new business have a clean start, so your current business performance won’t be related to your old one.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.

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